Syndicated loans and financial derivatives: ‛Belling the cat’ of market conditions


Project finance falls under the spotlight of competition authorities as traditional antitrust concerns over competitors’ joining forces meets with increasing worries about financial customers’ information asymmetries.

By Pablo Solano, expert in Competition and European Union Law 

It is always controversial for a competition watchdog to embark upon setting the adequate level of prices, which is a regulatory task. However, pricing, and more precisely “market conditions”, has been the thread pulled by the Spanish trustbuster (Comisión Nacional de los Mercados y la Competencia or “CNMC”) to unravel, felicitously or not, the long entangled knot of syndicated loans and financial derivatives in its recent Financial Derivatives decision.[1] In this article, the three limbs of the CNMC’s decision will be discussed: loan syndication as a cooperation agreement among competitors, price coordination, and tying off loan and hedge.

Loan Syndication

One would have expected that the joining of forces by certain major banks would have merited a deeper analysis in its own right under Article 101(1) of the Treaty on the Functioning of the European Union and its Spanish counterpart, Article 1(1) of Act 15/2007 dated 3 July on the Defence of Competition (the “ADC”), given the increasingly rigorous stance taken by European authorities regarding competitors’ consortia in other sectors. Nonetheless, the CNMC seems to turn a blind eye to this deeply engrained financial practice, while focusing on whether the lenders unlawfully coordinated the price of the derivative subsequently offered by them.

According to traditional case law,[2] the lessening of competitive pressure brought about by competitors—where collectively participating in projects, for instance, forming consortia to bid for tenders— is justified when they are not able to participate separately. In recent decisions,[3] the CNMC has adopted an interpretation where the onus of proof is practically reversed to the point that companies bear the burden of objectively justifying their participation in the project based on their lack of economic, financial or technical capability.

On this occasion, the watchdog seems to have simply refused to open the “can of worms”. Nevertheless, the stern stance towards consortia formed by competitors—, which is gaining a foothold in European competition enforcement— might, at some point, extend to project finance. Therefore, for financial entities to be on the safe side when joining forces into syndicated loans, they should check whether their risk policies would allow them to provide financing, individually or in smaller syndicates.


Price Coordination

The main reproach in Derivados Financieros, —i.e. the joint fixing of the derivative price elements by the syndicate banks— was in the European competition authorities’ agendas for more than a decade,[4] both in the European Commission’s[5] and in other European competition agencies’.[6] Across the pond, we find many similar examples, like the dismissal of CompuCredit’s accusation that certain hedge funds conspired to refuse to tender for its outstanding bonds in an attempt to raise their price.[7] Hence, it would come as no surprise if the Spanish decision was followed by enforcement actions across the European Union or even worldwide.

The CNMC buys that price coordination is necessary for the lenders to be on an equal footing as regards the guarantees subscribed and attempts to strike a fair balance by introducing the concept of “market conditions”. Therefore, the (innovative) theory of harm is that customers are given the price once it is agreed on by the banks, which would avail of this opacity to obtain more favourable terms than those resulting from negotiation in the market. Market conditions are, thus, the mantra repeated all along the decision to exorcise competition concerns. However, deciphering its arcane meaning requires understanding the trustbuster’s quest for a balanced decision that does not turn financial practice upside down.

Perhaps in order to provide a way out for a well-established practice, the controversial (and rather regulatory) task of defining “market conditions” is called to play a critical role in the competitive assessment of project finance.

Allegedly, at the very moment of the derivative subscription, banks set the fixed rate in zero-cost swaps or the floor in zero-cost collars[8]. They do this at such a level that the actual value to satisfy the stream of payments by the borrower equals the actual value of the stream of payments to be satisfied by the lending banks plus the actual value of a certain “spread”. It is unclear to authority’s, whether this “spread” has a (commercial) margin over the market value of the fixed rate or the floor, or whether zero-cost derivatives are incompatible with such margin kept by the banks.

Faced with this conceptual obstacle, the Spanish watchdog found Occam’s razor in the call records where banks computed the fixed rate or the floor before the customer joined to subscribe the derivative. The price-setting model could be justified by the fact that each entity may get different fixed rates or floors on the market depending on factors like credit rating or risk policy, thereby having to agree on the (marginal) strike price to be applied. However, the CNMC found that some comments by the bank’s representatives during the calls showed that price setting was not conducted on market conditions in casu without need to call into question the existence of a single fixed rate or floor, or even to dig into the margin issue.

This agreement to set prices over market levels behind the customers back –deemed to have allowed the lending banks to reap implicit commissions, despite the zero-cost character of the derivatives– was considered a restriction by object (i.e. without need to demonstrate anticompetitive effects). In reaching this conclusion, the CNMC alluded to the Court of Justice’s recent ruling that collusion between licensor and licensee to disseminate allegedly misleading information, on adverse reactions to a pharmaceutical product directly distributed by the licensor, where used for indications not covered by its market authorisation. This was a restriction by object, as it intended to erode the substitutability between its off-label use and another product marketed by the licensee.[9]

Consequently, in line with recent developments on the European level and in the field of financial regulation, transparency for consumers of financial products take centre stage in competition enforcement. By finding that banks were able to raise prices above market levels due to opacity for the customer, the CNMC is linking market conditions to individual quotations being addressed by the lenders to the borrower for the latter to decide, at arm’s length, which prices are acceptable. However, this solution would be difficult to administer because lender equality vis-à-vis guarantees admittedly require that a single price is set and, thus, if the price is not set at the marginal level, some banks will not cover losses or risks.

Syndicated loan and financial derivative tie-in

The anti-tying rule in Article 1(1)(e) of the ADC has essentially been dead letter in Spanish precedents. This trend was confirmed specifically for the financial sector in 2009 when the former Spanish competition authority ruled that conditioning the granting of mortgage and personal loans —upon the taking out of life or loan repayment insurance with an insurer belonging to the same group— was legitimate in the absence of evidence of an agreement or concerted practice among financial groups to tie-in loan and insurance or risk of exclusion (deemed unlikely to arise where there is no dominant position).[10]

Similarly, in the Financial Derivatives decision, the tying of syndicated loan and financial derivative is only examined as potentially instrumental for price coordination. The CNMC considered that this tie-in did not qualify as a stand-alone breach of Article 1 of the ADC deserving independent analysis, although any economic justification for it would be cancelled by the subsequent collusive pricing of the derivative above market level.[11] This could be linked to the stance taken by the United States judiciary[12] that lenders should avoid conditioning the extension of credit on the borrower’s purchasing other products or, if doing so, it should at least be justified by the reduction of the borrower’s credit risk and not merely by an increase in the lender’s own revenue.[13]

Consequently, in line with recent developments on the European level and in the field of financial regulation, transparency for consumers of financial products take centre stage in competition enforcement.



A false move in law enforcement in a business model—that seems to function like clockwork—may have spurious consequences. Thus, the Spanish authority settles for a minimalist approach focused on channeling price coordination towards an acceptable outcome for consumer welfare by requiring that it be conducted on market conditions. In other words, the method for jointly pricing financial derivatives could be necessary, but its result could come in for criticism where customers do not have a say and are imposed terms that are different from the market conditions to which they have consented. This compromise solution might be appealing for other national competition authorities across Europe and even for the European Commission.

Besides, syndication as an agreement bringing competitors together is overlooked, while no conclusive stance is taken as to the tying of syndicated loan and hedge. Rather, the authority accommodates tie-in concerns within the main theory of harm regarding collusion not to apply market conditions. Consequently, only the availing of tying in order to apply a single price above market level seems to be a problem, perhaps to be solved by ensuring that market conditions are indeed observed during the whole process that leads to the final bundle being offered to the customer.


Pablo Solano is an associate at the Competition and European Union Law department at Uría Menéndez. Previously, he pursued a master’s degree in European Law and Economic Analysis at the College of Europe (Bruges, Belgium). He regularly advises companies in a variety of sectors, such as pharmaceuticals, financial services, infrastructures, motor vehicles, telecommunications, food, industrial and building materials, utilities, transport, or energy. His practice focuses on EU and Spanish competition law and EU law. He works on a wide variety of national and international cases before the Spanish and EU authorities in relation to abuse of dominance, agreements and strategic alliances, mergers, and state aid, on implementing compliance programmes, and on assignments regarding EU fundamental freedoms, market unity and proceedings for unfair competition infringements affecting the public interest.

[1] Decision by the CNMC dated 13 February 2018 in file S/DC/0579/16 Derivados Financieros.
[2] See, for all, judgement by the National Court of Appeal dated 15 October 2012, appeal 204/2010, legal ground 5.
[3] See, for all, decision by the CNMC dated 30 June 2016 in file S/DC/0519/14 Infraestructuras Ferroviarias, legal ground 4.
[4] Communication from the Commission dated 31 January 2007 – Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report) (COM/2007/0033 final), paras. 9 and 29 to 37.
[5] See Management Plan 2018 – Competition, available here, or COMP/2017/008 EU loan syndication and its impact on competition in credit markets.
[6] See Nederlandse Mededingingsautoriteit, “Limited choice for undertakings when seeking syndicated loans”, 25 January 2010, available here, or Loan Market Association, Notice dated 30 May 2014 of the Application of Competition Law to Syndicated Loan Arrangements, available on here
[7] Ruling dated 28 May 2013 in CompuCredit Holdings v. Akanthos Capital Management, 661 F.3d 1312 (11th Cir. 2011).
[8] In a nutshell, in an interest rate swap, the borrower pays the difference where the loan’s floating interest rate falls below a fixed interest rate and the lending banks pay the excess where the floating interest rate goes over the fixed interest rate. In a collar, the lending banks are liable to pay the excess where the floating interest rate goes over a cap and the borrower commits to paying the difference where floating rate falls below a floor.
[9] Judgement by the Court of Justice dated 23 January 2018 in case C-179/16 Hoffmann-La Roche and others v AGCM.
[10] Decision by the Comisión Nacional de la Competencia dated 29 September 2009 in file 2789 Entidades de Crédito, legal ground 5.
[11] Derivados Financieros, cit., legal ground 4.2.1.
[12] Ruling dated 29 July 2009 in Adelphia Recovery Trust v. Bank of America, 646 F. Supp. 2d 489 (S.D.N.Y. 2009).
[13] Alan M. Christenfeld and Barbara M. Goodstein, “Analyzing Antitrust Issues in Lending”, New York Law Journal (2013), vol. 249, no. 108.

Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution